Saudi Arabia slashes oil production in December

1/10/2013

By SUMMER SAID and SARAH KENT

DUBAI -- Saudi Arabia cut its oil production by close to 5% in December in response to lower demand chiefly from Asian customers, the kingdom's deepest production cut in almost three years which comes amid expectations for lower demand for OPEC crude this year.

The sharp cut in production sent the price of European benchmark Brent crude to its highest level since October. US benchmark West Texas Intermediate crude also hit a near four-month high.

Saudi Arabia is the world's top oil exporter and has played an important role in the last two years as one of the few countries with enough spare production capacity to respond to market changes.

It substantially lifted production to fill supply gaps caused by the civil war in Libya in 2011 and kept it high as the West imposed tough oil sanctions against Iran last year.

As demand for crude from the Organization of the Petroleum Exporting Countries falls this year, the Saudi cut shows that the kingdom, "still wants to have, and does have, the role as the swing producer in the market," said Thina Saltvedt, a senior oil market analyst at Nordea Bank Norge.

Saudi oil production fell to 9.025 million bpd in December compared with 9.49 million bpd a month earlier, according to a person with direct knowledge of Saudi oil supply.

That marks the sharpest month-on-month cut in Saudi oil production since January 2009 when the country responded to the collapse in energy demand due to the global recession, according to data on the website of the Joint Organizations Data Initiative, a collaboration between oil producers and consumers aimed at increasing energy market transparency.

Still, the cut in output doesn't reflect a shift in Saudi Arabia's approach to supplying the oil market, but reduced demand for crude from the kingdom's customers, particularly in Asia, said the person.

Asia's demand for oil is especially significant as consumption in emerging markets has been the main driver of oil demand in recent years as Europe and the US struggle to turn their economies around.

Saudi Arabia has repeatedly stated its commitment to meet all requests for oil from customers in the last year, but analysts said the sharp cut in production was to be expected as demand remains sluggish and production increases elsewhere -- notably in North America and Iraq -- reduce demand for Saudi barrels.

"All of the numbers and the majority of analysts are all suggesting that as we go forward in the year the market is going to be significantly oversupplied," said Paul Stevens, senior research fellow in the energy, environment and development program at London-based independent policy institute Chatham House.

"There is pressure for OPEC to anticipate this and cut back and I suspect Saudi Arabia has been quietly doing this in order to reduce oversupply."

Recent production data suggest other OPEC oil producers have also cut back. A survey of industry sources and analysts conducted by The Wall Street Journal last week found output from OPEC members fell to its lowest level since October 2011 in December.

"Overall I think OPEC will keep things fairly steady after this recent reduction," said Simon Wardell, research manager in the energy practice at IHS Global Insight. "They've probably reduced output as much as I think they need to at this stage."